Big Data

Jens Prüfer and Christoph Schottmüller on competing with big data

Recent technological developments have led to large increases in both the availability of data and firms' ability to analyze them. Big data holds the promise that it may allow firms to learn about user preferences and thus design products that more closely match a consumer's personal needs.

Recent technological developments have led to large
increases in both the availability of data and firms' ability to analyze them.
Big data holds the promise that it may allow firms to learn about user
preferences and thus design products that more closely match a consumer's
personal needs.

However, as TILEC member Jens Prüfer and TILEC extramural
fellow Christoph Schottmüller argue in TILEC Discussion Paper no. 2017-006,
there is also reason to believe that big data reduces a firm's cost of
producing higher perceived quality, thereby creating what the authors call
"data-driven indirect network effects". They show that, if a market
has this feature, then it has a very natural tendency to tip, with one firm
taking over the entire market. For competition authorities, this is a cause for
concern, as the incentives to keep investing in quality are strongly diminished
after market tipping has occurred.

The authors also show that a firm that dominates a
data-driven market may be able to leverage its market power into what they call
connected markets, which are initially not data-driven, but where user
information from another market can be used to improve one's perceived product
quality. This can give rise to a domino effect. Finally, the authors discuss
the welfare consequences of intervening in data-driven markets by mandating
that firms share the data they collect with competitors. They show in
particular that mandatory data sharing is welfare-enhancing if the market is
close to being monopolized already.